The fine print of the Union Budget for 2020-21 notwithstanding, the central strategy of the government seems to be to boost the disposable incomes of the Indian consumers.
What was the problem slowing down the economy?
Typically, there are four engines of GDP (gross domestic product) growth. These are as follows: Consumption of the private individuals (or C), Demand for goods from the government (G), investments from the businesses (I) and the net demand from exports and imports (NX).
GDP = C + G + I + NX
With each passing year, the Indian economy has been losing its engines.
Corporate investments (I) engine has been slowing down since 2013. Thanks to domestic bottlenecks and a sombre global demand, net exports (NX) too were not of much help. That left only C and G – that is private consumption and government expenditure.
For the past two years, even private consumption started faltering and this has aggravated in the past one year, as witnessed in the slump in sales across the board.
Government demand carried the day for the longest time but with a sharp fall in revenues, there is no way the government can spend without gravely flouting the Fiscal Responsibility and Budget Management (FRBM) Act targets.
How does the government expect this strategy to work?
The government’s strategy, or hope at least, is that leaving people with more money will help boost their consumption levels, which are at present quite subdued, as witnessed in the slump in sales of goods and services across the board.
Higher consumption will bring down the inventories in the economy and incentivise businesses to invest again. The ground has been prepared to make investments attractive for businesses as the government has already cut the corporate tax rate last year.
Once the business activity recovers, the government would have more taxes coming to it and would be in a better position in the coming years to spend more prolifically.
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